Appeal from the United States District Court for the Northern District of Indiana, Hammond Division. No. 81 C 212 -- James T. Moody, Judge.

Wood and Eschbach, Circuit Judges, and Swygert, Senior Circuit judge.

Author: Swygert

SWYGERT, Senior Circuit Judge.

This is an appeal from a judgment of the district court, affirming an order by the Bankruptcy Court granting a discharge in favor of the debtors, Orrin C. Kreps, Jr. and his wife, over the objections of the First National Bank of Lansing ("First National").*fn1 There are two issues on this appeal. First, did the Bankruptcy Court apply the correct legal standard? Second, were the Bankruptcy Court's fact findings clearly erroneous? This appeal represents our first opportunity to interpret section 523(a) (2) (B) (iii) of the Bankruptcy Act of 1978, 11 U.S.C. § 523(a) (2) (B) (iii) (Supp. III 1979),*fn2 an issue explicitly reserved in Matter of Garman, 625 F.2d 755, 759 n.6 (7th Cir. 1980), cert. denied, sub nom. Garman v. Northern Trust Co., 450 U.S. 910, 67 L. Ed. 2d 333, 101 S. Ct. 1347 (1981). We reverse.

I

Many of the relevant facts are not disputed. Kreps and First National had a close business relationship. Gilbert J. Rynberk, Jr., First National's president, dealt personally with Kreps for fifteen years prior to the time of the loan at issue in these proceedings. First National had made a number of short-term loans to Kreps and, when requested, First National had routinely renewed these loans. These loans were related to Kreps' home construction business.

On August 17, 1978 Kreps received a $32,000 personal loan from First National. The loan was a ninety-day signature-only unsecured note. Possible uses of the money and Kreps' assets were discussed. It is conceded that Kreps indicated that the money might be used for a Wisconsin land deal; Kreps, however, did not use the money for that purpose. Kreps sought and received a renewal of the loan in November 1978.

In February 1979 Kreps again sought renewal of the loan. Following discussions with Kreps, Rynberk prepared a list of Kreps' assets which Kreps signed.*fn3 It is undisputed that this statement contained materially false information. The statement indicated that Kreps owned two lots and a house when, in fact, he owned only the house and the lot on which the house stood. It was false in other aspects which First National does not argue were material. First National renewed the loan, and shortly thereafter Kreps filed a petition for bankruptcy.

II

The Bankruptcy Court found that the February 1979 written statement was materially false concerning Kreps' financial condition and that it was made with an intent to deceive.*fn4 The Bankruptcy Court, however, also found that First National had not reasonably relied upon the statement. The relevant aspects of the decision are:

There is a question about the purpose of giving the statement of assets. Kreps talked about the long time he had done business with plaintiff and about their simple loan procedure in the past and said he assumed the statement was needed for the file in case a bank examiner came in or something of that sort. Rynberk's testimony was to the effect that the statement was needed to assure the bank that there were assets available if the loan was not repaid. However, it seems possible Rynberk may have said something about a bank examiner. When asked if he did, he answered "no, not that I recall" which was something less than positive.

The evidence does not convince the Court that Rynberk for the bank relied upon the statement of assets when renewing the loan. The court believes the renewal was induced by the bank's excellent loan experience with Kreps for more than 15 years.

Unpublished Order Bankruptcy No. 79-60904 (November 21, 1980) at 4.

In response to First National's motion for a new trial, the ...

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